Private sector must drive economy: Geithner

Treasury secretary plans big changes for Fannie and Freddie

AlistairBarr

WASHINGTON (MarketWatch) -- The U.S. economy is gradually recovering, but the private sector now must drive growth rather than the government, Treasury Secretary Timothy Geithner said Sunday.

During an interview on NBC's "Meet the Press," Geithner also said the government has big plans for reforming Fannie Mae
FNMA, -1.26%
and Freddie Mac
FMCC, -0.87%
the housing finance giants that now stand behind most of the mortgages in the U.S. after being bailed out by taxpayers during the 2008 financial crisis.

The U.S. economy lurched out of a painful recession last year thanks to massive monetary stimulus and heavy government spending. The recovery has slowed this year as the government began withdrawing some support, especially emergency measures to prop up the financial-services sector. The stock market slumped earlier this year on concern about a double-dip recession.

Geithner said Sunday that he doesn't expect a double-dip recession, citing encouraging signs in the economy.

Businesses are still "very cautious" and are trying to get as much productivity from current employees as possible, Geithner explained.

"They are in a very strong financial condition though. I think that's very promising because there's a lot of pent-up demand and there's a lot of capacity still for them to step up and start to invest and hire again," he added. "The government can help but we need to make this transition now to a recovery led by private investment."

There's a "good case" for the government to support small businesses, the unemployed and help states keep teachers in classrooms, but the transition to growth led by the private sector must happen, Geithner said.

"The issue is getting the private sector to kick up hiring and investment but the problem is one of incentives," said John Silvia, chief economist at Wells Fargo
WFC, -0.68%
one of the nation's largest banks. "Much of what I heard on the Sunday programs is that there is strong debate going on."

Geithner's comments follow Federal Reserve Board Chairman Ben Bernanke's statement in the past week that the outlook for the U.S. economy is "unusually uncertain" and that the Fed is willing to do more if economic growth proves to be weaker than forecast. Read story about Bernanke's testimony.

Despite the passage of wide-ranging financial reform on Wednesday, one of the most important parts of the U.S. economy remains unchanged -- and firmly under the control of the government. Fannie Mae and Freddie Mac guarantee most of the mortgages in the U.S. now and explicit government support for the companies has helped push the cost of home loans to record lows, helping a teetering housing market.

"We have to do what is necessary to make sure Americans can borrow to finance the purchase of a house. It's still in a lot of distress, but we've brought a measure of stability to house prices," Geithner said on Sunday.

Still, he stressed that the current system of housing finance has to change.

"We're not going to preserve Fannie and Freddie in anything like their current form. We're going to have to bring fundamental change to that market," Geithner said.

There's still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession, he explained.

"We're also going to have to take a look at the broad set of policies we put in place to help encourage home ownership and particularly help low income Americans get access to affordable housing," Geithner said. "We're going to take a very broad look at how best to do that."

The White House and congressional Democrats are in a brutal election-year fight with Republicans over job creation, taxes and spending.

On Saturday, Republican Rep. Mike Pence of Indiana said too many Americans remain out of work despite passage of the Democrats' economic stimulus package and that Congress has got to stop tax cuts from expiring at the end of this year.

On Sunday, Geithner said the government wants to preserve tax cuts for 95% of Americans and complement those with incentives for small businesses to grow and hire.

"To make that possible and do that responsibly I think it is good policy to allow those tax cuts that go to only 2 or 3 percent of the highest earners in the country to expire as scheduled," he added. "The country can withstand that."

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